Okay, so my earlier prediction about gold having a short term pull back is proving correct, albeit a few days early. I originally thought that gold would only start its pull back based on the outcome of the Fed Reserve speech on Friday (see my earlier post on why here). However it appears that traders have started to take some money off the table in advance which has led to falls in the gold price over night.
Only adding fuel to the fire is an increase in gold margin requirements by the Comex. The margin required to trade gold futures was increased by 27% to $9,450 per 100 ounce contract in the speculative Tier 1 category. This follows an earlier increase of 22% on 11 August 2011. The net effect of this move is that it makes it more expensive for speculators to trade and hold gold, thus resulting in the traders reducing or liquidating open positions.
Now anyone has had had even a passing interest in the precious metals market will recall what happened to silver earlier in the year. For those who don’t know margin requirements were raised by Comex. As I have stated earlier in my blog I base my investment decisions on fundamental advice, however I could not resist posting another chart based on the latest moves in the gold price.
As I mentioned in my earlier post gold went parabolic and had broken out of its upward channel. At the time I commented that it would be better for gold in the long term to pull back and consolidate at a new level before continuing its upward trend. Based on last night’s trading and the action of the CME (Comex owner) I now think gold is replicating what silver did earlier in the year.
As you can see from the above chart silver (in USD) went parabolic after breaking out of its channel. Shortly after the CME raised margin requirements and the price came crashing back down. This followed by a period of consolidation between $33 and $38 an ounce. It then hovered around the $40 mark before taking off over the last few weeks alongside gold (it has also followed gold’s pull back).
If we now look at the gold chart we can see the same parabolic move, followed by a pull back and CME margin hikes. If gold is to continue the same pattern set by silver I would expect gold to pull back into its original channel and consolidate between $1500 and $1700. Much like silver I anticipate it will then recommence its upward march sometime in late 2011 or early 2012.
As a result of this action I have decided to hold off taking a position in a current gold producer. I feel that if we are going to see a larger pull back in the price of gold that some stocks (and in particular the one I am looking at) will also be sold off. I will still accumulate my longer term holding once I have concluded my research and feel satisfied with its future potential. I look forward to providing more information on this stock once I have finalised my research.
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